A Dynamic Theory of Optimal Capital Structure and Executive Compensation / Andrew Atkeson, Harold Cole.

Format:

Book

Author/Creator:

Atkeson, Andrew.

Contributor:

National Bureau of Economic Research.

Cole, Harold.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11083.

NBER working paper series no. w11083

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

We put forward a theory of the optimal capital structure of the firm based on Jensen's (1986) hypothesis that a firm's choice of capital structure is determined by a trade-off between agency costs and monitoring costs. We model this tradeoff dynamically. We assume that early on in the production process, outside investors face an informational friction with respect to withdrawing funds from the firm which dissipates over time. We assume that they also face an agency friction which increases over time with respect to funds left inside the firm. The problem of determining the optimal capital structure of the firm as well as the optimal compensation of the manager is then a problem of choosing payments to outside investors and the manager at each stage of production to balance these two frictions.

Notes:

Print version record

January 2005.